Oracle Corporation faces mounting pressure in the credit market, as the cost to insure its debt has reached levels not seen since 2021. This development is primarily attributed to the company’s ambitious spending on artificial intelligence (AI) infrastructure, raising eyebrows among investors and analysts.
Credit Default Swaps on the Rise
Oracle’s five-year credit default swaps (CDS) have soared to 1.25 percentage points, marking a three-year high. These financial instruments, which act as insurance against potential default, signal growing concerns about the tech giant’s financial stability. Morgan Stanley warns that without clearer plans for financing, CDS costs could climb further, possibly reaching 1.5 percentage points soon or even hitting two percentage points by 2026—levels last seen during the 2008 financial crisis.
Massive AI Spending Driving Debt
The root of the issue lies in Oracle’s substantial borrowing to fund its expansion into AI and data centers. In September, the company raised $18 billion in bonds, followed by another $18 billion project loan for a New Mexico data center campus. Additionally, a $38 billion loan package is in development for facilities in Texas and Wisconsin, built by Vantage Data Centers. These construction loans have driven banks to hedge their exposure, causing a ripple effect in the CDS market.
Market Performance and Investor Concerns
Oracle’s CDS have underperformed the broader investment-grade index, and its bonds have lagged behind the Bloomberg high-grade bond index. The company’s stock has also faced pressure despite a recent 4.02% gain, closing at $204.96 on November 26.
The December 15 earnings call is anticipated to be a pivotal moment. Analysts predict earnings of $1.64 per share on revenues of $16.2 billion, but all eyes will be on Oracle’s plans to fund its AI ambitions and address mounting debt concerns. Uncertainty surrounding projects like Stargate and the company’s overall capital spending could prolong investor fears.
Morgan Stanley’s Changing Strategy
Morgan Stanley has adjusted its trading recommendation in light of Oracle’s current financial challenges. The firm now advises focusing solely on credit protection rather than combining it with bond purchases. Analysts believe this strategy better captures potential profits from widening CDS spreads.
Final Thoughts: A Crucial Moment for Oracle
Oracle’s aggressive push into AI comes with significant risks. The December 15 earnings call will be a critical juncture for the company to provide clarity on its financing strategies and reassure investors.
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